“House hopper” loses out
Wall v. The Queen (2019 TCC 168) is a recent case of a so-called “house hopper” who repeatedly built and sold new homes, purporting to move into each one as his principal residence. He was assessed for both income tax and GST, and he lost his appeal to the Tax Court.
Wall was a real estate agent and developer in Vancouver. He sold homes in 2006, 2008 and 2010, for a total of $5.8 million (and apparent profit of $2.2 million) without reporting the profits as income and without remitting any GST. Wall took the position that each home was his principal residence and therefore the principal-residence exemption applied.
Wall was assessed for income tax on his profits of $2.2 million, plus gross negligence penalties. (The $2.2 million was after expenses for which the CRA generously gave him credit based on estimated construction costs; he had not kept any records or invoices.) He was also assessed for GST not remitted out of each home sale. As well, he was assessed for income tax and GST on the sale of a vacant lot. The total GST assessment, including interest and failure-to-file penalties, was almost $600,000. He appealed the assessments to the Tax Court of Canada.
The Tax Court judge allowed the appeal only in two respects, both as conceded by the CRA at trial. First, Wall’s gain on the vacant lot was a half-taxed capital gain rather than business profit; Wall had co-purchased the lot with his wife in 1992, and became sole owner in 1998 after they separated. Second, the CRA had inadvertently added $160,000 to Wall’s income by assessing an amount in the wrong year, so this was reversed. In other respects the assessments were upheld.
Wall claimed that he built each of the three homes with the intention of living there, and sold each one only due to a change of circumstances and mounting debts. However, the judge did not find Wall credible, especially since he could not have financed any of the homes on his reported income, and he had a long history of developing and selling properties. Furthermore, Wall did not earn any real estate commissions during the years in question, other than from a few sales for himself and family members; it was clear that he devoted all his work time to the building and resale of these homes.
The judge reviewed Wall’s testimony in detail and found it riddled with inconsistencies, contradicted by other evidence, and simply not credible on many points. The Court did not believe that Wall actually lived in any of the homes, as there was no reliable evidence of this.
The income tax gross-negligence penalties were also upheld, since he “knowingly determined that he would not report his income from the sale of the Three Homes on the basis that he would claim the principal residence exemption”. He knowingly made “blatant” false statements, and the penalty applied. The same facts justified the late reassessments, which otherwise would have been statute-barred.
On the GST side, it was clear that Wall was a “builder” as defined in the legislation. He had not built the homes purely for personal occupancy. As a result, the sale was taxable and all penalties were upheld.